Facing the music abroad — but not at home

Published On 06/06/2017 | By Sam Goldsmith | Enforcement, Mergers

On 18 May 2017, the European Commission fined Facebook €110 million for two counts of providing misleading information to the Commission in its merger approval filing for the acquisition of WhatsApp. In this post, we consider the significance of the decision in the context of the EU regulatory landscape, and the comparatively meagre monetary penalties available under the Competition and Consumer Act (Act) back in Australia.

Conduct in question

Under the EU’s merger control regime, notification of a merger is mandatory if it has an “EU dimension” by virtue of meeting certain turnover thresholds. Notification must be made by means of an approved form (Form CO), which requires the inclusion of specific information such as details of the parties, the transaction and the relevant markets. Parties must also submit a broad range of supporting information and documents, including as to the rationale for the deal.

As part of Facebook’s argument as to why the acquisition would not raise serious competition concerns, it indicated in both its original 2014 notification form for the acquisition and in response to the Commission’s subsequent request for further information that it would not be able to automatically match users’ Facebook accounts and WhatsApp phone numbers. In 2016, after the transaction had been authorised and completed, updates to Facebook’s terms of service and privacy policy referred to the possibility that it could match this information. This discrepancy prompted the Commission to investigate, which led to the finding that Facebook was aware at the time of its original filing that it was technically possible to match users across the two platforms.

Precedent-setting fine

This fine is the first the Commission has imposed under the 2004 Merger Regulation (Regulation) for intentionally or negligently providing incorrect or misleading information in a notification or supplement thereto. Article 14(1) of the Regulation gives the Commission extensive fine-setting powers – it can impose a fine of up to 1% of a company’s aggregate turnover for a breach (according to Facebook’s 2016 figures, that maximum was €248 million).

In determining the amount of the fine, the Commission has regard to the nature, gravity, and duration of the infringement. In this case, the figure was reduced on account of mitigating circumstances – namely Facebook’s cooperation with the investigation.

Sending a message

It is interesting to note that the Commission acknowledged that the information in question would not have affected its decision to authorise the transaction. Indeed, in the course of making its original decision, the Commission had considered the possibility that Facebook would in fact have the user matching capability.

The Commission’s decision to impose such a substantial fine despite the fact that the infringement had no bearing on the outcome of the merger authorisation sends a clear message. It tells us that the Commission places great importance on ensuring that it has all (and accurate) relevant information available to it when assessing transactions. The scale of the fine warns companies that they must provide correct and complete information in their dealings with the Commission, and that even procedural violations will be met with heavy penalties.

The Australian position

The ACCC’s powers to impose penalties for similar procedural breaches are small by comparison. Indeed, the Facebook fine exceeds the highest ever single penalty imposed in Australia for a substantive breach of competition law. Below, we have summarised the key penalties that could be available in similar circumstances in Australia.

1. Voluntary provision of information: merger clearance applications

While Australia’s merger control regime is entirely voluntary, the Australian equivalent of the EU merger control process is a formal merger clearance application under Part VII, Division 3 of the Act (although it is also possible to seek informal clearance). Like the EU’s processes, these applications rely on the regulator having access to full and correct information, and a complete picture of the operations of the relevant entities. However, the penalties that can be imposed in Australia for knowingly or recklessly providing false or misleading information to the ACCC in the course of such an application pale in comparison to those available under the EU Regulation.

Under the Act, the maximum pecuniary penalty that a Court can impose on a body corporate for a breach of this nature is $33,000 for each act or omission. Other available remedies under the Act include injunctions, divestiture orders, and “non-punitive orders” such as community service, probation, information disclosure orders, and publication of advertisements in terms specified by the Court. Injunctions are available where clearance is granted on the basis of information that was false or misleading, and if that information had not been given, the clearance would not have been granted.

Additionally, under the Commonwealth Criminal Code, it is a crime to knowingly provide false or misleading information to a Commonwealth entity, a person exercising power or performing functions under a Commonwealth law, or in compliance or purported compliance with a Commonwealth law. The offence carries a penalty of 12 months’ imprisonment. The same penalty applies to the offence of knowingly providing a false or misleading document to a person in compliance or purported compliance with a Commonwealth law.

2. Compulsory provision of information: section 155 orders

Under section 155 of the Act, the ACCC has the power to compel a person to provide information, documents and evidence if the Commission believes that the person is capable of providing information that relates to a potential contravention of the Act, including a contravention of the prohibition on mergers that would have the effect of substantially lessening competition under section 50. This power can be used whether or not a party has made a formal or informal application for merger clearance.

It is a criminal offence to knowingly provide information or evidence that is false or misleading in response to a section 155 notice. The maximum penalty is currently $3,600 or 12 months’ imprisonment for an individual, and $18,000 for a body corporate. These figures will increase to $4,200 and $21,000 respectively when penalty units increase on 1 July 2017 (read more here).

3. Substantive breaches: where misleading information is discovered after a clearance has been granted

The Commission has the power to revoke a formal merger clearance if it finds that the clearance was granted on the basis of false or misleading information. This may leave participants in the merger in question liable to a breach of section 50. In addition to the possibility of divestiture orders (i.e. unwinding the merger), the pecuniary penalty payable for each act or omission in breach of that provision is the greater of:

  • $10 million;
  • three times the value of the benefit that the body corporate obtains directly or indirectly and that is reasonably attributable to the relevant act or omission; and
  • 10% of the annual turnover of the body corporate in the 12 months to the end of the month in which the act or omission occurred.

Conclusion

The European Commission has set a powerful precedent. It has imposed a substantial penalty for a procedural breach of the EU’s competition law, despite the fact that the breach had no bearing on any substantive outcomes. The EC’s significant fine-setting powers provide a strong incentive for companies to comply carefully with their obligations to provide full and correct information to the European regulator.

Australia’s penalty regime for the provision of false or misleading information to the ACCC is much lighter. We will watch with interest in the coming years to see whether Australian lawmakers look to the European example to create greater incentives for compliance back home.

 

[ Image credit: Frinck51 (resized and colour changed) / Wikimedia Commons / CC BY-SA 3.0 ]

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About The Author

is a solicitor in the Sydney office of King & Wood Mallesons.

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